I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

QUESTION 

Associates

 

Which two of the following investments would be treated as an associate in the consolidated financial 

statements of Smith Co?  

A 

Smith Co owns 15% of the ordinary shares of Red Co and has significant influence over Red Co. 

B 

Smith Co owns 45% of the ordinary shares of Pink Co and can appoint 4 out of 5 directors to the 

board of directors of Pink Co. 

C 

Smith co owns 40% of the preference shares (non-voting) and 15% of the ordinary shares of 

Yellow Co. 

D 

Smith Co owns 60% of the preference shares (non-voting) and 40% of the ordinary shares of 

 Aquamarine 

Co. 

ANSWER 

The correct answers are A and D. 

Red Co is an associate of Smith Co, as Smith Co has significant influence over Red Co. 

Pink Co is a subsidiary of Smith Co, as Smith Co's ability to appoint 4 out of 5 directors gives it control 

over Pink Co.  

Yellow Co is a trade investment of Smith Co, as Smith Co holds less than 20% of the voting rights of 

Yellow Co, so is assumed not to have significant influence. Note that the preference shares do not have 

voting rights so do not have any influence over the running of the company. Remember that 

shareholdings are not the only way of demonstrating control or significant influence. If it could be shown